CRA is looking at many different matters when evaluating whether a charity fundraisng activities are compliant?  One of the methods is to look at the amount of fundraising expenditures to fundraising revenue.  Some people have fixated only on the ratio but it seems to me that CRA in general is more concerned with whether a charity is conducting prohibited activities or certain “indicator of concern” than just the fundraising ratio.  Anyway amongst the general public about 40% of people think charities should not be spending any money on fundraising costs and the other 60% expects that on average charities should spend something like 15%.  While there are some charities that can do some fundraising with no cost this is increasingly the exception and not the rule.  CRA’s general acceptance of fundraising ratios of 35% or less and statement that fundraising costs to reveneu above 70% “will raise concerns with the CRA” and “The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is in compliance; otherwise, it will not be acceptable”.  CRA’s position to say the least is generous.  Charities should be cognizant of their fundraising costs and as the public is very concerned with fundraising costs those charities with higher fundraising costs should be able to show why the costs are so high and what is being done to reduce to the ratio of fundraising cost to expenditure.

CRA’s Fundraising Guidance provides:

“9. Evaluation of fundraising activities

For the purposes of this assessment fundraising revenues and expenditures are:

• Fundraising revenues include amounts reported on Lines 4500 and 4630 of the charity’s annual Form T3010. All amounts for which a charitable tax receipt is issued must be reported on line 4500. All other revenue generated as a direct result of fundraising expenses must be reported on line 4630.
• Fundraising expenditures include amounts reported on Line 5020 of the charity’s annual Form T3010. All expenses determined to be fundraising expenses in accordance with this guidance should be reported on line 5020.

Fundraising Ratios and the CRA’s Approach
The CRA recognizes that the charitable sector is very diverse and that fundraising effectiveness will vary between organizations. There can be good reasons for a charity to incur higher fundraising costs for a particular event or in a particular year. As a result, a range of factors will be considered in the course of a CRA review. One of the factors that the CRA will consider is the ratio of fundraising costs to fundraising revenue. The following table provides some general guidance in terms of where the CRA may seek additional information or justification for fundraising costs.

Fundraising ratios alone are not determinative in assessing whether a charity’s fundraising complies with the requirements of the guidelines in this guidance. However, these ratio ranges give charities a way to generally gauge their performance and understand the circumstances where the CRA is likely to raise questions or concerns.

Ratio of costs to revenue over fiscal period CRA Approach
Under 35% Unlikely to generate questions or concerns.
35% and above The CRA will examine the average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely it is that there will be concerns and a need for a more detailed assessment of expenditures.
Above 70% This level will raise concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is in compliance; otherwise, it will not be acceptable.

In addition to considering where a charity falls within the ratio ranges, the CRA will look to the factors described in paragraphs 10 and 11 below, when it considers a charity’s fundraising activities. In addition, the CRA’s assessment of a charity’s fundraising will take into consideration the following factors:
a. The size of the charity (which might have an impact on fundraising efficiency).
b. Causes with limited appeal (which could create particular fundraising challenges).
c. Donor acquisition and planned giving campaigns (which could result in situations where the financial returns are only realized in later years).

a) The size of the charity (which might have an impact on fundraising efficiency)
The size of a charity might have an impact on fundraising efficiency. The CRA generally considers that registered charities with revenues under $100,000 have a small constituency. In these cases the CRA will consider whether the fundraising costs are reasonable given the profile of the community the charity serves or with which it works, and whether the charity can demonstrate that costs are being adequately controlled.

b) Causes with limited appeal (which could create particular fundraising challenges)
The CRA recognizes that charities that advance causes with limited appeal may encounter particular fundraising challenges. These charities could include those conducting research into the prevention and cure of an emerging disease, that is relatively unknown, and charities with causes that are less popular with the general public, such as those supporting the rehabilitation of violent offenders. The CRA may be prepared to accept some higher costs for these charities, provided these can be shown to be reasonable given the nature of the cause that the charity advances and that it can demonstrate costs are being adequately controlled.

c) Donor acquisition and planned giving campaigns (which could result in situations where the financial returns are only realized in later years)
Donor acquisition and planned giving campaigns could result in situations where financial returns are only realized in later years. The CRA recognizes that the cost of donor development represents a long-term investment on the part of a charity. Provided a charity can demonstrate that it has adopted recommended best practices (see below) for fundraising to control and reduce costs, the CRA may be prepared to accept the higher costs associated with donor development solicitations.
Donor development includes, but is not limited to, direct mail campaigns, telemarketing, and face-to-face solicitations by paid canvassers. Special events may also be a way of identifying potential donors. Returns from donor development are often not realized within the fiscal period in which the spending on development occurs. However, donor development costs should, generally, decline over time as the charity and its fundraising activities become more established.
CRA rules do not permit the attribution of fundraising expenditures to future years, or the issuance of receipts for contributions pledged for future years. Because of this, the CRA recognizes that revenue-to-cost ratios calculated within a calendar or fiscal year may not fully reflect a charity’s operations.”

To review the CRA Fundraising Guidance see “How do I find the CRA Guidance on Fundraising for Canadian charities?